Published 4:00 am, Friday, November 1, 1996

What's this about utilities as growth stocks? You've got to be kidding. But Geraldine Weiss, who edits the Investment Quality Trends newsletter in La Jolla (San Diego County), couldn't be more serious. "As deregulation causes utilities to become more diversified and competitive," she says, "they could become growth stocks, just as they were in the 1960s."

Weiss may be right, but Prudential Securities utilities analyst Barry Abramason isn't so sure. While he believes earnings will indeed start growing, he doesn't think they'll ever grow fast enough to win back the growth stock label, "because their basic business will still be selling the same product or service that has very slow growth of demand."

Unlike the 1960s, when the growing population and the widespread adoption of air-conditioning helped spur electrical use, there's little today to give demand a jolt. Even diversification doesn't promise profits, because the utilities will face increased competition which should drive down prices.

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So, what will drive earnings? Weiss thinks a wave of consolidation that will drive costs so low that even a small increase in demand will produce surprisingly strong earnings gains. "I'm a great believer in history repeating itself," she says.

In the meantime, enjoy your dividends, assuming they don't get cut.

SHORT POSITIONS

-- IPO Insanity: If you ever wondered whether the quality of companies trying to go public has taken a turn for the worse, take a look at Santa Barbara-based Earthshell Container, which hopes to raise $187 million. Don't be fooled by its blue-chip lineup of underwriters, including First Boston, Salomon Brothers and Montgomery Securities.

This development-stage company is trying to produce environmentally safe fast food containers made from such commonly available raw materials as limestone, sand, potato or cornstarch, wood fiber and water. It's such a good idea that McDonald's is testing such containers in 40 Las Vegas restaurants, and Earthshell already has licensing agreements with several large packaging companies.

However -- this is what makes the "risk factor" section of prospectuses such entertaining reading -- the company already has $46 million in accumulated losses since its founding four years ago.

And it says there's no way to know whether it can produce the products in an assembly line, or whether the FDA will even approve the packaging. Despite its environmental claims, the company discloses that "one national environmental organization" doesn't believe Earthshell's sandwich container is any better than what McDonald's already uses. In fact, according to the prospectus, the environmental group believes McDonald's current packaging would be environmentally superior to Earthshell's if it would just increase the amount of recycled material it uses.

-- Sleight-of-hand: A recent item here regarding America Online stirred quite a bit of commentary, mostly from readers who didn't know why I was making such a big fuss about capitalizing, or deferring, certain expenses.

For example, H. Lewis asks: "If an investor doesn't like to see these expenses capitalized, can't he just subtract them from earnings and then make his judgment on the resulting figures?"

Absolutely, but when it comes to raising cash by issuing new stock, many investors look at the stated earnings per share, and nothing else.

Then there was this, from Ernest Adams, parts unknown, who writes: "Doesn't America Online have an obligation to its investors to keep its stock price up? And when a company is going to show losses instead of profits, don't we want to encourage them to take innovative steps to avoid that?"